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June 2006 performance review

June started out a little rocky but recovered somewhat as the month progressed. The S&P500 was up just .14% while the Dow was essentially flat (down .05%). Tech was a touch weaker, with the Nasdaq off .31% in June.

Sell High

07/13/06 -

The top of the great emerging markets run will likely be very close to the levels hit on May 16, 2006. That’s the day Dreyfus filed with the Securities and Exchange Commission to launch another emerging market stock fund – to be named Dreyfus Emerging Markets Opportunity Fund.

With billions of new money flooding into emerging markets funds (after a massive three-year rally that has seen most funds in the category triple in value), Dreyfus is getting tired of sitting on the sidelines while competitors bring in all the loot.

Can you blame ‘em? Emerging market funds are about the last area where a fund company can make an honest buck. Management fees for your typical emerging market stock fund are double domestic stock funds – even the ETFs in this area have high expenses. iShares MSCI Emerging Markets Index (EEM) charges 0.75% a year. As this ETF recently peaked at around $14 billion in assets, Barclays Global Investors (the company behind the popular ETFs) rakes in more money from this fund than any other they run.

Ask MAX: Payoff Debt or Takeoff in Funds?

07/06/06 -

Ray and Margaret ask: 'We are a 26-year-old couple getting married and want to invest our wedding money in the best way possible. (We estimate receiving 25k.) My fiancé is still in grad school, and I am paying off student loans. Should we put the money toward paying off our educations? Or should we invest it in a mutual fund?'

As an investment advisor, I should tell you to pay off all debts before investing because it's unlikely you'll earn more investing than the rate on your debts — especially after taxes, commissions, and the like. Plus, it's a lower risk strategy — imagine your investments go sour, you lose your job (the two can be correlated with the economy) AND you still have your debts.

That said, I'd only pay off high interest rate debt like credit cards (and then only if you WON'T rack the debt right back up). Student loan interest is acceptable debt to carry. For one, unless you earn a lot of money ($65,000 per year single filers or $130,000 for joint filers) the interest is deductible on your taxes (thank you Bill Clinton). Credit card interest is not deductible (thank you Ronald Reagan).

Buying Opportunity?

Let’s check in with what fund investors are doing – and as usual, consider doing something else.

Ask MAX: Should I Settle for 3%?

06/30/06 -

Robin asks: 'I am retired and widowed. Since the stock market has been so up and down, should I just put my savings (less than $100,000) in a savings account paying 3%? I feel that I am too old to always be keeping an eye on the stock market.",

The stock market is always up and down. The key is to only invest an amount of money that you can stand to see go up and down. The single biggest mistake investors make is investing too much of their portfolio and panic selling after an ordinary 10% - 20% drop in the market — often right before the market turns around.

Consider putting some of your money in a low fee stock index fund like Vanguard 500 Index (VFINX) — perhaps just 25% if you are nervous about losing money. A larger chunk, say 50%, should be in lower risk investments. A low fee bond index fund like Vanguard Total Bond Index (VBMFX) is a decent choice with limited downside (perhaps 10% in a down market for bonds) and a roughly 5.25% yield. The rest (25%) could be in a virtually no risk investment like a Vanguard money market fund — the Vanguard Prime Money Market Fund, currently yielding just under 5%. Fidelity has an equally good and cheap lineup of similar funds.

Buy these funds through Vanguard to save on commissions that an ordinary broker may charge.

As for earning 3% in savings - shoot higher. I've linked my checking account to HSBC Direct and ING's Orange Savings account (both are “online” savings accounts — FDIC insured with no risk). You can sweep money in anytime and earn over 4% (these are not teaser rates but current rates will change with swings in shorter term interest rates). HSBC Direct currently yields a whooping 5.05%. Your bank branch can't come close to matching these rates on liquid FDIC insured money with no minimum or transfer fees.

A Fund Fee We Love

06/22/06 -

Nobody hates mutual funds fees more than we do. At MAXfunds.com, we absolutely hate loads, deplore high expense ratios, and barely tolerate 12b-1 fees. So you'd think when the Securities and Exchange Commission ruled last year to continue to allow mutual fund companies to charge shareholders for selling shares of a fund (up to 2% in redemption fees) that we'd be hopping mad. But we're not. In fact, we're actually tickled pink. Redemption fees, you see, are the ones we absolutely love.

Redemption fees are charged by some funds if an investor sells a position held for less than a certain period of time. The amount of the fee and the redemption fee period varies from fund to fund, but a common redemption fee is 1% of sales made within 90 days after purchase.

Redemption fees do bear a strong resemblance to back-end loads (or contingent deferred sales commissions or CDSCs), which we hate. So why are we in favor of a fee that seems to do just about the same thing? Because redemption fees discourage short-term investing - the practice of hopping in and out of a fund to benefit from quick rises in NAV prices.

Why Bother?

While we have nothing against shopping around for a high-yield CD, we think you can do better with low-fee bond funds most of the time. In fact, our general forecast for stocks coupled with our risk aversion in our lower risk portfolios is why we own bond funds.

Callable CDs

06/01/06 -

Imagine getting an FDIC-insured 6.5% return with zero risk! Too good to be true? With Callable CDs you can get mouthwatering returns without the ups and downs of stocks. Trouble is, you can’t have your cake and eat it too.

CDs (certificate of deposit) are appealing to risk-averse investors. They are FDIC-insured against loss (unlike mutual funds) and readily available with just a few thousand dollars at your local bank – seemingly without sales charges or commissions.

With interest rates on the rise, CDs are becoming more attractive, particularly to those worried about stock market gyrations and low dividend yields from stocks.

Because of the safety, CDs typically don’t yield much – the best CDs yield slightly more than government bonds for similar maturities. As interest rates have climbed in recent weeks, investors can typically get around 4% - 5.5% on better CDs, depending on the term.

New AARP Fund

05/26/06 -

It's a match made in mutual fund marketing heaven.

AARP, the organization dedicated to the interests of persons who aren't quite as young as they used to be, launched its first three mutual funds and the end of 2005. And you don't have to be over 50 – the minimum age to join AARP – to invest in them.

AARP's Conservative, Moderate, and Aggressive Funds are geared toward investors with risk tolerances ranging from, well, conservative to aggressive. Each fund invests in a different mix of three underlying index funds managed by State Street Global Advisors. Those indexes track U.S. stocks through the MSCI U.S. Investable Market 2500 Index, international stocks through the MSCI EAFE Index, and U.S. Bonds through the Lehman Brothers Aggregate Bond index.

According to AARP, the aim of the new no-load funds is to make the investment process easier in hopes of encouraging people to increase the amounts they invest.